Verizon Dials Up a Big Pension Boost

Verizon Communications Inc.’s earnings got a big lift Tuesday from a change it made in its pension accounting a few years ago, and some other companies could see similar gains in the days to come.

Verizon recorded a $6 billion pretax gain in its fourth-quarter earnings for “severance, pension and benefit” credits – largely due to a gain from “mark-to-market” accounting for its pension plan, the method to which Verizon switched in 2011. After taxes, that amounted to $3.7 billion, or $1.29 a share – the biggest contributor to Verizon’s fourth-quarter earnings of $1.76 a share under official accounting rules.

That was a major turnaround from the fourth quarter of 2012, when Verizon reported a severance, pension and benefit loss of $7.2 billion pretax, or $1.55 a share after taxes, that weighed down its earnings.

Verizon is one of a handful of big companies that have made an optional switch to mark-to-market accounting, to make the results of their pension plans easier for investors to understand. They follow market prices for their pension assets, and they no longer “smooth” the impact of pension gains and losses into their earnings over a period of years.

Those companies recognize the impact of their switch through a fourth-quarter adjustment to their earnings each year, to account for the difference between their expectations for their pension plans’ performance and the year’s actual results. For 2011 and 2012, that meant losses, largely because interest rates were falling – that increased the current value of pension obligations, which affected the plans’ expenses.

Michael Stefanski, Verizon’s head of investor relations, said on the company’s earnings conference call Tuesday that the gain was the result of a higher discount rate – an interest-rate assumption used to value pension obligations – along with changes in actuarial assumptions and a higher-than-expected return on pension assets.

Verizon prominently reported both its official earnings of $1.76 a share and an “adjusted” number of 66 cents a share that excluded the pension gain and other special items. A spokesman for the company declined further comment.

Among the other companies that could see similar fourth-quarter gains in coming days: AT&T Inc., which reports earnings on Jan. 28, and Kellogg Co., which reports on Feb. 6. Both have made the mark-to-market switch; AT&T reported a $10 billion mark-to-market loss in the fourth quarter of 2012, while Kellogg reported a $401 million loss in that period. AT&T declined to comment Tuesday; Kellogg couldn’t immediately be reached for comment.

Not all mark-to-market companies will see gains – some record adjustments to their earnings only if their pension gains or losses exceed a minimum amount, known as a “corridor.” Honeywell Inc. and United Parcel Service Inc., for instance, have indicated they don’t foresee significant mark-to-market gains for the latest fourth quarter.

Update:An earlier version of this post incorrectly identified Michael Stefanski as Verizon’s treasurer.